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Is leadership a value creation lever?

December 8th, 2021

Is leadership a value creation lever?

The question around leadership is often divorced from value creation. While we recognise individual leaders as successful because of the value they create, often we don’t think about leadership itself as a value creation lever.

To us, this is the wrong way of thinking about leadership. Leadership in many ways is the key value creation lever. It is the primary control mechanism that owners, investors and the board possess to effectively execute their value creation plans.

In this context, a large part of our 2021 Insights Report, looks at Leadership Change as a value creation lever. We compared the senior leadership changes made at private equity-backed companies across different performance quartiles. In sum, we found that the best performing businesses are more likely to make leadership change, make more change and make change sooner. Clearly, the best value creation businesses recognise the power of leadership to drive value.

We found that top quartile (Q1) businesses were more likely to make at least one change to their c-level group, with 98% doing so, while 91% of bottom quartile (Q4) companies took the same action.

We also found that better performing companies averaged a higher number of personnel changes, at 3.7, versus their less-well performing counterparts at 3.4.

Source: Leadership Dynamics, 2021

At the chief executive level, we noted a negative relationship between the number of years into a CEO’s hold period and the company's financial success: CEOs in Q4 companies were changed every 4.6 years on average while CEOs in Q1 companies were changed every 2.6 years.

Moreover, 55% of changes in the Q1 group were made in the first two years, compared with 38% among Q4 businesses.

These are just some of the headline results from our report but by reviewing the sum of these findings, we can put forward that, yes, leadership change is a lever for value creation. It’s an incomplete answer, though. Why? Because, on average, the Q1 and Q2 companies made changes to increase the situational experience of the role significantly. These changes resulted in a slight decrease in domain experience. Only Q4 companies made domain-enhancing changes.

Source: Leadership Dynamics, 2021

What this reveals is the importance of building towards a complementary leadership group. That’s why, via our Leadership Dynamics product, we help businesses build the right level of functional diversity and situational complementarity so that within a framework of unpredictable internal and external factors, the leadership team still has the flexibility to execute.

Businesses often make the mistake of focussing on the domain and functional expertise of their leadership group, which is to say, their ability to do what is required of the business at this moment in time.

While necessary, this measure alone is not sufficient to optimise value creation. Having people within the leadership group who have been through a value creation process, and therefore have a level of situational experience, is, moreover, the single most important way to optimise the leadership group and provide a key point of difference across the growth journey.

 

Samuel Robberts
Director, Head of Leadership Dynamics
sr@draxexecutive.com

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